U.S. stocks fell for a third-straight session, sending the broad market to its worst weekly decline since early July. Since mid-July the S&P 500 has recorded weekly gains of 2.2% or more in six of those 11 weeks. One has to go back to right around the July 4 holiday to see even a meager pullback of 7%; it’s unusual to see a move to the upside we’ve witnessed since early March without a pronounced correction. We will get that correction, there is no way around it and the higher we go without one occurring, the deeper it will be.
The market ran into another slight roadblock as Friday’s weak durable goods orders report and new home sales failed to meet expectations (and the prior month’s reading was revised lower). This data offset an improvement in a consumer confidence survey.
Friday morning’s news out of Iran, confirming that they have a second uranium-enrichment facility, didn’t help investor sentiment either. However, I’ve got to say, the market’s resilience is remarkable. This is big news and yet investors hardly flinched.
One has to assume any chance at sanctions on Iran is off of the table now – even if our Congress is unwilling to admit it. The mullahcracy has cemented a deal with Venezuela to supply the regime with gasoline and it is highly likely that Russia will truck refined product into Tehran simply to put a thorn in our side. Since Iran has very little refining capabilities, this was what many saw as their main non-military weakness, but that has now changed. The options are becoming a heck of a lot more concerning. It seems a lot of people continue to hold out for concrete measures from the UN and G-20 on getting Iran to change course, but only a sucker would expect anything of substance out of these two organizations as China and Russia can block anything that has bite to it.
Basic material, financial and industrial shares led Friday’s decline. Energy and health-care shares were the relative winners, even though they too closed lower.
Market Activity for September 25, 2009
Durable Goods Orders
The Commerce Department reported that durable goods orders fell 2.4% in August (much less than the 0.4% rise that was expected) after the CFC–driven jump of 4.8% in July. Ex-transportation orders, durables printed a big goose egg after rising 0.8% in July.
The headline reading was led lower by transportation orders, which fell 9.3%. Vehicle and parts orders did rise a bit, up 0.4% (although this number was probably expected to be much stronger as most thought vehicle assemblies to be robust after CFC-driven sales). The incredibly volatile commercial aircraft component led the transportation reading lower as this segment plunged 42.2% after surging 98.2% in July.
So this brings us to the ex-trans number, which came in flat -- unchanged. Orders for both primary (cars) and fabricated metals rose 1.9% and 0.8%, respectively. Machinery orders gained 0.7% after a 7.9% drop in July. Computer and electronics and electrical-equipment orders put pressure on ex-trans as these components fell 0.7% and 0.5%, respectively.
The market ran into another slight roadblock as Friday’s weak durable goods orders report and new home sales failed to meet expectations (and the prior month’s reading was revised lower). This data offset an improvement in a consumer confidence survey.
Friday morning’s news out of Iran, confirming that they have a second uranium-enrichment facility, didn’t help investor sentiment either. However, I’ve got to say, the market’s resilience is remarkable. This is big news and yet investors hardly flinched.
One has to assume any chance at sanctions on Iran is off of the table now – even if our Congress is unwilling to admit it. The mullahcracy has cemented a deal with Venezuela to supply the regime with gasoline and it is highly likely that Russia will truck refined product into Tehran simply to put a thorn in our side. Since Iran has very little refining capabilities, this was what many saw as their main non-military weakness, but that has now changed. The options are becoming a heck of a lot more concerning. It seems a lot of people continue to hold out for concrete measures from the UN and G-20 on getting Iran to change course, but only a sucker would expect anything of substance out of these two organizations as China and Russia can block anything that has bite to it.
Basic material, financial and industrial shares led Friday’s decline. Energy and health-care shares were the relative winners, even though they too closed lower.
Market Activity for September 25, 2009
Durable Goods OrdersThe Commerce Department reported that durable goods orders fell 2.4% in August (much less than the 0.4% rise that was expected) after the CFC–driven jump of 4.8% in July. Ex-transportation orders, durables printed a big goose egg after rising 0.8% in July.
The headline reading was led lower by transportation orders, which fell 9.3%. Vehicle and parts orders did rise a bit, up 0.4% (although this number was probably expected to be much stronger as most thought vehicle assemblies to be robust after CFC-driven sales). The incredibly volatile commercial aircraft component led the transportation reading lower as this segment plunged 42.2% after surging 98.2% in July.
So this brings us to the ex-trans number, which came in flat -- unchanged. Orders for both primary (cars) and fabricated metals rose 1.9% and 0.8%, respectively. Machinery orders gained 0.7% after a 7.9% drop in July. Computer and electronics and electrical-equipment orders put pressure on ex-trans as these components fell 0.7% and 0.5%, respectively.
The very important business spending reading (technically, non-defense capital goods ex-aircraft) fell 0.4% after a 1.3% decline in July. Businesses remain cautious and will continue this stance so long as an over-bearing government keeps the private sector uneasy.
Shipments of durable goods orders fell 1.4%. This number flows directly to GDP, so it won’t be helpful for the third-quarter reading. And speaking of GDP, it appears that the biggest boost from the inventory dynamic will occur in the fourth quarter, not the current quarter as many had expected.U of M Confidence
The final reading for September consumer sentiment out of the University of Michigan’s survey showed a three point increase to 73.5 from the initial reading of 70.2 and up from 65.7 for August.
Both the Current Conditions and Economic Outlook (six months out) surveys were revised higher from the preliminary readings. Inflation expectations for the next year fell to 2.2% from 2.8%.New Home Sales
The Commerce Department reported that new home sales rose 0.7% to 429,000 at an annual rate (a bit below the expectation for a 1.6% rise). By region, sales fell in the Northeast (smallest market for new homes) and Midwest and rose in the South (largest market for new homes) and the West.
The inventory/sales ratio made additional progress, falling to 7.3 months worth (lowest since January 2007) from 7.6 months in July.
The median price of a new home got slammed last month, down 9.5%.
The August number may be beginning to show the signs of the front-loading effect due to the tax credit. I suspect the September reading will begin a trend of falling sales as those who sign a contract struggle to close by November 30 – even if that credit is extended we should see sales decline again as the extension will hardly be perfectly continuous.
Fed’s Eventual Direction
Other big news on Friday was Fed Governor Warsh’s comments via an Op/Ed on how the FOMC will have to aggressively raise rates (much more than is customary) when the time comes, whenever that may be.
We’ve discussed this topic for some time now. It’s pretty simple, based on their extraordinary/ unprecedented level of easing the other side of this will be harsh. This is the main reason no one should expect this expansion to be long-lasting. The crutches that currently support the economy will turn and whip it when they are reversed – combine this with higher tax rates and protectionist policies (pray this doesn’t occur) at the same time and you’re looking at massive economic headwinds.
Futures
Stock-index futures have reversed coarse, after being meaningfully lower early this morning they are now pointing to a higher open. International bourses were supported by electoral victories for Germany’s pro-business government, allowing most overseas indices to pare earlier losses and offering support to the U.S. trading session. M&A activity is also offering support as Xerox stated it will pay $6.4 billion for Affiliated Computer Services and Abbott Labs will buy Solvay’s pharmaceutical unit.
Still, with all of the uncertainties, which have now just increased as we can’t make light of the fact that Israel’s trigger finger just got itchier, one has to be cautious with the market at this level. It seems unwise to increase equity exposure, but that is the tendency when stocks are in rally mode and the impulse to win back losses overtakes common sense.
Have a great day!
Brent Vondera, Senior Analyst
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